Bankruptcy is when an individual or organization is unable or has impaired its ability to pay its creditors. Creditors may file a bankruptcy petition against a business or corporate debtor in order to recover a portion of what they are owed. However, sometimes bankruptcy can be initiated by the debtor himself/herself.
Although bankruptcy may be caused by perky spending and a lavish lifestyle, these aren't the only reasons why it occurs. A person can be declared bankrupt due to humongous medical expenses, joblessness, uncontrolled urge of spending money, divorce expenses or due to any other unexpected disaster.
Bankruptcy is a way of dealing with any debts when you are unable to pay them back. It is generally the last resort to rest with as it means selling off any of the assets that you have. Bankruptcy also affects your career as it can't be kept a secret. You can expect that its details will be listed in your local newspaper which can cause embarrassment. Any of the resources that you have in your home could be used by the Court to pay off your debts. Sometimes there is a risk that you may lose your house too. By being declared bankrupt, your credit rating will be marked as low. This means that if you apply for credit, you will probably be declined and, face high repayments or interest amounts.
A bankruptcy may be discharged after one year. Discharge releases the bankrupt person from most of the debts owed at the date of the bankruptcy order. This means the debtor will be freed from the obligations. However, the discharge may not necessarily free the debtor from all liabilities and certainly doesn't mean that unrealized assets will be safeguarded.
There are some exceptions when the debtor is not released from his/her debts. These exceptions include debts arising from fraud, certain crimes and fines. There are other cases like damages, personal injury or money owed under family proceedings that require the Court's approval before they are discharged.
Discharge may not happen automatically when one year lapses, but can be postponed by the court. A person is able to apply to the court for a discharge after 5 years of the date of his/her current bankruptcy order and even then, the court may refuse or delay the discharge sometimes.
Assets which were obtained before the discharge rest with the Official Receiver or a trustee, who can deal with them anytime in future. However it may not be for a very long period after your discharge. These assets can be claimed to pay off your debts to your creditors. Once you are discharged, it doesn't put your duties towards the trustee to an end. Rather, you will be assisting him/her even after you have been discharged.
If you have acquired assets after the discharge, then you usually get to keep them. Once a person is discharged and freed from the whole process of bankruptcy, it is not necessary that he/she will not become bankrupt ever again in life. If you end up in further bankruptcy after the first instance, it may have more serious consequences like prosecution. Once a person has made the mistake indebting himself/herself and has gone through the bankruptcy process, he/she should manage their finances more carefully next time.